IDEAS home Printed from https://ideas.repec.org/a/eee/apmaco/v386y2020ics0096300320304975.html
   My bibliography  Save this article

Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant

Author

Listed:
  • Ye, Taofeng
  • Yang, Huiqiang

Abstract

We consider a firm that sells a product to strategic consumers sensitive to both price and quality over two periods. The firm can change its product quality and must determine its prices in both periods as well as whether and how to change product quality in the second period. In equilibrium, the firm would choose one strategy from the following four: simultaneous markdown and downgrade, markdown only, simultaneous markup and upgrade, and simultaneous markdown and upgrade. Such a policy structure holds irrespective of whether the firm is patient. However, the policy set shrinks when the marginal cost changes from quadratic to linear in quality and expands when customer types are uncertain in the sense that the firm is not certain about the upper bound of the support of the customer type. In the latter, the equilibrium policy is same when the uncertainty is the highest as when uncertainty is absent.

Suggested Citation

  • Ye, Taofeng & Yang, Huiqiang, 2020. "Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant," Applied Mathematics and Computation, Elsevier, vol. 386(C).
    • Handle: RePEc:eee:apmaco:v:386:y:2020:i:c:s0096300320304975
    DOI: 10.1016/j.amc.2020.125541
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0096300320304975
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.amc.2020.125541?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gérard P. Cachon & Robert Swinney, 2009. "Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 55(3), pages 497-511, March.
    2. Qian Liu & Garrett J. van Ryzin, 2008. "Strategic Capacity Rationing to Induce Early Purchases," Management Science, INFORMS, vol. 54(6), pages 1115-1131, June.
    3. Ding, Min & Ross, William T. & Rao, Vithala R., 2010. "Price as an Indicator of Quality: Implications for Utility and Demand Functions," Journal of Retailing, Elsevier, vol. 86(1), pages 69-84.
    4. Xuanming Su, 2007. "Intertemporal Pricing with Strategic Customer Behavior," Management Science, INFORMS, vol. 53(5), pages 726-741, May.
    5. Byong-Duk Rhee, 1996. "Consumer Heterogeneity and Strategic Quality Decisions," Management Science, INFORMS, vol. 42(2), pages 157-172, February.
    6. Hongyan Shi & Yunchuan Liu & Nicholas C. Petruzzi, 2013. "Consumer Heterogeneity, Product Quality, and Distribution Channels," Management Science, INFORMS, vol. 59(5), pages 1162-1176, May.
    7. Lacourbe, Paul, 2012. "A model of product line design and introduction sequence with reservation utility," European Journal of Operational Research, Elsevier, vol. 220(2), pages 338-348.
    8. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics (QME), Springer, vol. 5(3), pages 239-292, September.
    9. Byong‐Duk Rhee & Seth W. Norton, 2001. "Strategic Quality Decisions under Heterogeneous Resource Endowments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 235-264, June.
    10. Robert Swinney, 2011. "Selling to Strategic Consumers When Product Value Is Uncertain: The Value of Matching Supply and Demand," Management Science, INFORMS, vol. 57(10), pages 1737-1751, October.
    11. Judith Chevalier & Austan Goolsbee, 2009. "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1853-1884.
    12. Nikolay Osadchiy & Gustavo Vulcano, 2010. "Selling with Binding Reservations in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 56(12), pages 2173-2190, December.
    13. Yossi Aviv & Amit Pazgal, 2008. "Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 339-359, December.
    14. Vincent Mak & Amnon Rapoport & Eyran J. Gisches & Jiaojie Han, 2014. "Purchasing Scarce Products Under Dynamic Pricing: An Experimental Investigation," Manufacturing & Service Operations Management, INFORMS, vol. 16(3), pages 425-438, July.
    15. Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    16. Mallik, Suman & Chhajed, Dilip, 2006. "Optimal temporal product introduction strategies under valuation changes and learning," European Journal of Operational Research, Elsevier, vol. 172(2), pages 430-452, July.
    17. Man Yu & Hyun-Soo Ahn & Roman Kapuscinski, 2015. "Rationing Capacity in Advance Selling to Signal Quality," Management Science, INFORMS, vol. 61(3), pages 560-577, March.
    18. Gérard P. Cachon & Robert Swinney, 2011. "The Value of Fast Fashion: Quick Response, Enhanced Design, and Strategic Consumer Behavior," Management Science, INFORMS, vol. 57(4), pages 778-795, April.
    19. Mahmood Pedram & Subramanian Balachander, 2015. "Increasing Quality Sequence: When Is It an Optimal Product Introduction Strategy?," Management Science, INFORMS, vol. 61(10), pages 2487-2494, October.
    20. Qian Liu & Garrett van Ryzin, 2011. "Strategic Capacity Rationing when Customers Learn," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 89-107, September.
    21. Qian Liu & Dan Zhang, 2013. "Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation," Management Science, INFORMS, vol. 59(1), pages 84-101, August.
    22. K. Sridhar Moorthy & I. P. L. Png, 1992. "Market Segmentation, Cannibalization, and the Timing of Product Introductions," Management Science, INFORMS, vol. 38(3), pages 345-359, March.
    23. Xuanming Su & Fuqiang Zhang, 2009. "On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers," Management Science, INFORMS, vol. 55(5), pages 713-726, May.
    24. Xiaowei Xu, 2009. "Optimal Price and Product Quality Decisions in a Distribution Channel," Management Science, INFORMS, vol. 55(8), pages 1347-1352, August.
    25. Eyal Biyalogorsky & Oded Koenigsberg, 2014. "The Design and Introduction of Product Lines When Consumer Valuations are Uncertain," Production and Operations Management, Production and Operations Management Society, vol. 23(9), pages 1539-1548, September.
    26. José Correa & Ricardo Montoya & Charles Thraves, 2016. "Contingent Preannounced Pricing Policies with Strategic Consumers," Operations Research, INFORMS, vol. 64(1), pages 251-272, February.
    27. Tingliang Huang & Qian Liu, 2015. "Strategic Capacity Management When Customers Have Boundedly Rational Expectations," Production and Operations Management, Production and Operations Management Society, vol. 24(12), pages 1852-1869, December.
    28. Xuanming Su & Fuqiang Zhang, 2008. "Strategic Customer Behavior, Commitment, and Supply Chain Performance," Management Science, INFORMS, vol. 54(10), pages 1759-1773, October.
    29. Man Yu & Laurens Debo & Roman Kapuscinski, 2016. "Strategic Waiting for Consumer-Generated Quality Information: Dynamic Pricing of New Experience Goods," Management Science, INFORMS, vol. 62(2), pages 410-435, February.
    30. Jun Li & Nelson Granados & Serguei Netessine, 2014. "Are Consumers Strategic? Structural Estimation from the Air-Travel Industry," Management Science, INFORMS, vol. 60(9), pages 2114-2137, September.
    31. Gonca P. Soysal & Lakshman Krishnamurthi, 2012. "Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis," Marketing Science, INFORMS, vol. 31(2), pages 293-316, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rui Hou & Zibin Cui & You Zhao, 2022. "Pricing leadership decisions of competing firms with consumer learning," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2326-2346, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yen-Ting Lin & Ali K. Parlaktürk & Jayashankar M. Swaminathan, 2018. "Are Strategic Customers Bad for a Supply Chain?," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 481-497, July.
    2. Liu, Jingchen & Zhai, Xin & Chen, Lihua, 2019. "Optimal pricing strategy under trade-in program in the presence of strategic consumers," Omega, Elsevier, vol. 84(C), pages 1-17.
    3. Yiwei Chen & Vivek F. Farias, 2018. "Robust Dynamic Pricing with Strategic Customers," Mathematics of Operations Research, INFORMS, vol. 43(4), pages 1119-1142, November.
    4. Arian Aflaki & Pnina Feldman & Robert Swinney, 2019. "Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing," Operations Research, INFORMS, vol. 68(4), pages 1116-1131, July.
    5. Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    6. Yossi Aviv & Mike Mingcheng Wei & Fuqiang Zhang, 2019. "Responsive Pricing of Fashion Products: The Effects of Demand Learning and Strategic Consumer Behavior," Management Science, INFORMS, vol. 65(7), pages 2982-3000, July.
    7. Fei Gao & Xuanming Su, 2017. "Manufacturing & Service Operations Management," Manufacturing & Service Operations Management, INFORMS, vol. 19(1), pages 84-98, February.
    8. Yiangos Papanastasiou & Nicos Savva, 2017. "Dynamic Pricing in the Presence of Social Learning and Strategic Consumers," Management Science, INFORMS, vol. 63(4), pages 919-939, April.
    9. Ken Moon & Kostas Bimpikis & Haim Mendelson, 2018. "Randomized Markdowns and Online Monitoring," Management Science, INFORMS, vol. 64(3), pages 1271-1290, March.
    10. Wu, Meng & Ran, Yun & Zhu, Stuart X., 2022. "Optimal pricing strategy: How to sell to strategic consumers?," International Journal of Production Economics, Elsevier, vol. 244(C).
    11. Vincent Mak & Amnon Rapoport & Eyran J. Gisches, 2018. "Dynamic Pricing Decisions and Seller-Buyer Interactions under Capacity Constraints," Games, MDPI, vol. 9(1), pages 1-23, February.
    12. Dong, Junfeng & Wu, Desheng Dash, 2019. "Two-period pricing and quick response with strategic customers," International Journal of Production Economics, Elsevier, vol. 215(C), pages 165-173.
    13. Mohammed Al-Hitmi & Salman Ahmad & Atif Iqbal & Sanjeevikumar Padmanaban & Imtiaz Ashraf, 2018. "Selective Harmonic Elimination in a Wide Modulation Range Using Modified Newton–Raphson and Pattern Generation Methods for a Multilevel Inverter," Energies, MDPI, vol. 11(2), pages 1-16, February.
    14. Nicole Perez Becker & Benny Mantin & Joachim Arts, 2022. "Strategic Behavior in a Serial Newsvendor," DEM Discussion Paper Series 22-02, Department of Economics at the University of Luxembourg.
    15. Ali K. Parlaktürk, 2012. "The Value of Product Variety When Selling to Strategic Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 371-385, July.
    16. Liu, Jingchen & Zhai, Xin & Chen, Lihua, 2018. "The interaction between product rollover strategy and pricing scheme," International Journal of Production Economics, Elsevier, vol. 201(C), pages 116-135.
    17. Özalp Özer & Yanchong Zheng, 2016. "Markdown or Everyday Low Price? The Role of Behavioral Motives," Management Science, INFORMS, vol. 62(2), pages 326-346, February.
    18. Narayan Mishra & Sri Vanamalla Venkataraman, 2022. "Optimal order quantity in the presence of strategic customers," Annals of Operations Research, Springer, vol. 315(2), pages 1871-1894, August.
    19. Cuihong Li & Fuqiang Zhang, 2013. "Advance Demand Information, Price Discrimination, and Preorder Strategies," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 57-71, September.
    20. Yanan Song & Xiaobo Zhao, 2017. "A newsvendor problem with boundedly rational strategic customers," International Journal of Production Research, Taylor & Francis Journals, vol. 55(1), pages 228-243, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:apmaco:v:386:y:2020:i:c:s0096300320304975. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/applied-mathematics-and-computation .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.